Limitation of time and Refund of Tax vs Deposit under Indirect tax Laws

[Srinivasan Krishnamachari]

The current article discusses the aspect of limitation of time with respect to Refund of certain taxes of indirect nature such as Central Excise duty, Customs Duty, Countervailing Duty and Service Tax or various connected cess with the above duties / taxes as the case may be, but erroneously paid. 

The governing provisions for grant of refund in the Central Excise and Service Tax Laws are Section 11 B of the Central Excise Act, 1944 & in the Customs Law it is Section 27 of the Customs Act, 1962. 

The above provisions of these Acts broadly specify that such duties / taxes together with interest thereon if any, paid erroneously, are refundable within one year from the relevant date. 

The baseline for calculation of one year is taken from the date of original payment of such duties / interest, claimed as refund; but if the same is arising out of a decree or order, then from the date of such decree or order. 

That said, now the next point is whether the taxes so paid erroneously are refundable even beyond one year and if so when?

The answer is no, when the taxes so paid are under the authority of Law but excess paid either partly or fully but erroneously when not having any tax liability at the time of such payment.

Generally, if you look into the Service Tax laws, it provides for self- adjustment of such excess payments and so also the new GST Law. 

But, in the Central Excise and the Customs Laws, there were no such self-adjustment mechanism prescribed.

Hence, the assessee under self-assessment, had to claim back such refunds from the authorities by following the set procedure and within one year from the date of effecting such excess payments of taxes / interest. 

That is quite understandable. But, what about taxes that got paid by mistake by the assessee when there was no tax liability per se, in the first place. 

In such a situation, what would be the nature and character of such erroneous payments made under the nomenclature and code of the said tax under a tax challan though, as belonging to the Union Duties of Excise / Customs / Service Tax, Cess, interest, etc, especially when it is made without attracting any authority of Law. 

The answer could be, that it is a mere payment of an amount lacking the character of a tax and hence the authority and the provisions of law.

The obvious outcome of the above situation is, such taxes are refundable without application of any time limit, namely, one year usually prescribed under the said laws from the base date / relevant date.

In real time situations, it is the experience of the assessees that such taxes / interest paid without the authority of law erroneously, when claimed beyond one year, are invariably rejected by the Department as not conforming to the time limit of one year under the extant laws. 

Is that correct? Perhaps, Not.

When an exemption notification is applied from a backdate but the assessee went on paying the taxes during that period and claimed the tax so paid beyond one year, the limitation of time was applied and claim of refund was rejected, which is wrong. 

During the time when tax was erroneously paid when exemption was applied retrospectively, the payment of tax made by the assessee lacked any authority / sanction of law and hence the amount is refundable without limitation of time.

In a case of excess payment made and claim of refund was made beyond the self-adjustment time frame, the refund was rejected. 

Is that right? Perhaps, again not.

The reason being, the facility of self-adjustment comes with a time window and beyond that self-adjustment is barred as the window closes but the refund door also closes which is not correct. 

When God closes one door, He opens another.  But taxation law seems to dislike the above scheme of nature and the refund is barred eternally.

But, eventually in these cases, the jurists had to come to the assessee’s rescue to help uphold the sceptre of law, in ordering the refund without the limitation of time in the above cases of dispute.

Similarly, taxes remitted as advances collected, as per point of taxation law, but later on order for supply got cancelled rendering performance of contract impossible, the taxes so paid when claimed beyond one year, were denied on the ground of limitation of time. 

Is the stand taken correct? Definitely, Not. 

The taxes so paid under the presumption of future provision of services, lost the sanction of law, due to frustration of contract in the interim, and hence the taxes paid originally transformed into a mere deposit of an amount.

When no unjust enrichment could be proved against the assesse, there is no sanction of Law under Article 265 of the Constitution, for such amounts, being held by the Revenue.

The next question that is asked by the Jurists these days, is, how is it okay for the  Government to hold on to such taxes without either being refunded or transferred to the Welfare Fund?

Consequently, such refunds are being granted reluctantly by the Revenue, in the above cases without the application of limitation of time of one year.

But one question that still remains to be answered after having said all this is, can one claim the refund beyond any time say 5 years under the pretext of non-applicability of time. 

The answer perhaps is no. 

There is, something called latches in law and that is a reasonable time. And applying the general principles of limitation of time under the General Clauses Act, 1897, a period of 3 years from the relevant date, is good time to claim refunds in the above situation.

But what needs to be taken note here, is the bright spot in GST Law, where the time limit for claiming refund itself is 2 years which is not very far from the 3 years’ time limit suggested above by the Author.

I must observe that raising the usual limitation for claiming refund under the extant GST Law from 2 years to 3 years, would find tune with the time limit prescribed for demands of tax under the flip side of the same GST Law, which is a very good thing to do.

In all the laws of Indirect Tax, to resolve the legacy issues of refunds, however, it would do good to resonate the above precedents of law.

While dealing with cases of refund of excess taxes paid erroneously without authority of law, by granting it to them even beyond one year subject to a maximum of perhaps 3 years in sync with General Limitation Laws, Government will send right signals to trade and industry that they are working under a proud and progressive tax regime, called GST.

 

Krishnamachari Srinivasan IRS (Retd)

(The Author is a Former Assistant Commissioner of GST, Chennai and a CBIC Master Trainer GST, and currently a Senior Asssociate, Indirect & Corporate Taxes, at a Chennai-based Law Firm, RANK Associates. The views of the Author are purely personal.) 

Discussions to this article

[KASTURI SETHI]

Respected Sir,

.Your article is full of logical as well as legal force. I read your article again today with the judgement of CESTAT New Delhi in the case of NRK Homes Pvt.Ltd. vs. CCE reported as 2020 (4) TMI-344 decided on 24.1.2020 . It is worthwhile to note that your views synchronized the decision of CESTAT, New Delhi. Your article dated 1.7.19 has inspired me to go through all the articles published in TMI as well as TIOL.

[Srinivasan Krishnamachari]

It's my pleasure and honour to write in TMI which is easily a very good and friendly tax portal. Thanks for this honour of your fresh accolades, Mr. Sethi, Sir. Your portal has discerning eyes under the oversight of Gupta ji. Thanks again.

Rgds

K. Srinivasan